Stocks Rally as Cooler Inflation Fuels Strong Bets on Fed Rate Cuts and Market Gains This Fall

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Stocks Rally as Cooler Inflation Fuels Strong Bets on Fed Rate Cuts and Market Gains This Fall

2025-08-12 @ 23:01

Stocks climbed as fresh inflation data boosted expectations for Federal Reserve rate cuts, lifting the Dow, S&P 500, and Nasdaq. The move followed a cooler-than-expected CPI report that reinforced the view that price pressures are easing and that the Fed could begin easing policy as soon as this fall. Rate-sensitive sectors led the advance, while Treasury yields fell and futures priced in higher odds of multiple cuts by year-end.

The Consumer Price Index showed inflation continuing to slow on a year-over-year basis, with core inflation—the Fed’s preferred indicator of underlying trends—moderating further. Month-over-month readings suggested disinflation is broadening beyond goods into select service categories, a dynamic investors have been waiting to see. With wage growth decelerating from last year’s pace and shelter inflation gradually easing, the market read the report as confirmation that restrictive policy is working and no longer needs to be tightened.

Fed funds futures quickly adjusted: odds of a first cut at an upcoming meeting rose, and traders increased bets on two to three cuts by the end of the year. Shorter-dated Treasury yields declined as markets pulled forward the timing of policy easing, while the 10-year yield slipped on softer inflation and improved confidence that the Fed can achieve a soft landing. The dollar eased modestly, offering an additional tailwind to risk assets.

Equities responded with a broad rally. Mega-cap tech and growth stocks outperformed on the drop in yields, with semiconductors and software extending recent leadership. Cyclical groups tied to domestic demand, including consumer discretionary and industrials, also advanced on the prospect of lower borrowing costs and steadier real income growth. Financials were mixed as lower yields weighed on net interest margins for some lenders, though improving credit expectations supported the group.

Within defensives, utilities and real estate caught a bid given their sensitivity to interest rates. REITs, which had lagged amid higher-for-longer fears, rallied on the view that cap rates may stabilize if financing costs fall. Healthcare saw selective strength, with managed care steady and biotech benefiting from a more favorable risk appetite. Energy lagged the tape as crude prices consolidated and investors rotated toward duration-sensitive assets.

Earnings season remained a key catalyst in single-stock moves. Companies with resilient margins and clear AI-related demand drivers continued to be rewarded, while firms guiding cautiously on the consumer or citing delayed enterprise spending faced pressure. Guidance quality—particularly commentary on order backlogs, pricing power, and expense discipline—mattered as much as headline beats.

Looking ahead, the focus turns to the next round of inflation and labor data, along with Fed communications heading into the fall. Markets will parse whether the Fed signals confidence that inflation is on a sustainable path toward 2%, or if policymakers prefer to see several additional benign prints before cutting. A key swing factor remains shelter: further cooling in rents could accelerate progress on core inflation. Another is the services ex-housing category, where gradual normalization in wages and productivity could continue to ease price pressures.

For investors, the backdrop has shifted from “higher for longer” to a credible path toward “lower but careful.” If disinflation persists and growth moderates without cracking, risk assets could remain supported by the combination of easing policy and stabilizing earnings. However, positioning is extended in some leadership areas, leaving markets sensitive to upside surprises in inflation or downside surprises in growth. Diversification, attention to balance sheet quality, and an eye on duration exposure remain prudent.

Key takeaways:
– A cooler CPI print boosted confidence in a fall Fed rate cut, pushing stocks higher and yields lower.
– Rate-sensitive sectors—tech, real estate, and utilities—outperformed, while financials and energy were mixed.
– Futures now imply a faster easing path, but the Fed will likely remain data-dependent, with shelter and services inflation under close watch.
– Earnings resilience and guidance clarity continue to drive dispersion beneath the surface.

In short, the inflation trend is moving in the right direction for markets, and the policy door is opening. The next few data points will determine how wide it swings.

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Risk Warning​

*Investment involves risk. You may use the information, strategies and trading signals on this website for academic and reference purposes at your own discretion. 1uptick cannot and does not guarantee that any current or future buy or sell comments and messages posted on this website/app will be profitable. Past performance is not necessarily indicative of future performance. It is impossible for 1uptick to make such guarantees and users should not make such assumptions. Readers should seek independent professional advice before executing a transaction. 1uptick will not solicit any subscribers or visitors to execute any transactions, and you are responsible for all executed transactions.

© 1uptick Analytics all rights reserved.

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